Ok, we all know how steadfast and generous the Fed has been toward stock investors over the past six years. Well, actually, over the past 35 years! And of course we return the love! Yes indeed. And we all know that the Fed can never ever raise interest rates because that would crash the markets. And momma Fed would never abandon us.

Most stock investors seem to think uber-dove Charles Evans proclaiming that “raising interest rates would be a catastrophe” in an unguarded moment on January 8 is an accurate reflection of what Fed heads will actually do, despite all their talk about raising rates sometime in mid year 2015.

Up until recently all of this Fed talk of “normalizing rates” was just talk.

But funny things are beginning to happen as we drift along that permanently high plateau resting on its bedrock of zero percent short term interest rates. In the past, hyperinflations were enabled by the presence of stable currencies in neighboring countries and the lack of currency controls. But with major currencies such as the Yuan, the Euro and many others pegged to the dollar, most capital and wealth in developed and developing countries is fairly complacent. In a U.S. Fed rigged world it is hard to start a serious inflation in any nation with a significant economy.

But with the Swiss Frank suddenly unpegged from the Euro, and with gold now rising along with – and slightly outpacing – the dollar, two very liquid and secure havens seem to have popped up on the horizon. And the negative interest rates in Switzerland or Denmark will allow the European middle class to hoard Swiss or Danish bank notes at zero percent rather than paying for the privilege of depositing their cash in a bank and exposing themselves to “bail in” risk.

Thus, potential convenient inflation hedges are popping up even in Europe. Once oil starts to rise in price the Russian Ruble – an oil backed currency from a country with very little sovereign debt – will offer yet another very attractive alternative.

Of course the biggest threat to the comfort of mother FED's stock market cradle is the new Greek coalition which insists that any bailout that results in more debt is a non-starter. This means that Greek debt is going to be “restructured” which in turn means reduced-defaulted. But then the only way Greece is going to be able to get back on its feet is to repudiate all of its sovereign debt, abandon the Euro and issue the new Drachma. This in turn will mean a massive bailout of European and American banks which under EU rules may consider Greek sovereign bonds as “money good” collateral backing their massive interest rate derivatives, threatening large and fast interest rate moves which produce bank derivative contract defaults. Therein lies the trigger for PIIGS debt repudiation and massive money printing by the ECB or the German and French national banks not in the form of additional bank debt but in outright grants of cash – the fiscal policy trigger for hyper inflation.

There are numerous signs that the Fed is beginning to worry not only that QE is not working as it should to produce growth and prosperity, but that continued QE might go far beyond just damaging its “credibility” and utterly destroy its continued relevance to and power over the markets. In short the FED is beginning to worry about its institutional survival. Failure means that Congress will monkey with the Federal Reserve Acts which grant it power.

Thus the survival of the FED, its power and continued relevance are the top priority right now. The fate of the stock market is a secondary concern. Any investor who fails to see this is dancing with the devil in the pale moonlight.

The FED heads apparently think that if they raise rates just a wee smidge – that in the next crisis they will at least have some interest rate ammo, enough to be invited to the table and thus remain relevant and perhaps rally the markets a bit.

In short, to preserve their institutional power the FED is going to “Volker” your asses!! Well, maybe just an iddy biddy “Volker” that won't hurt too much, they hope!

In my view the debt balloon problem has grown so large that no tweaking by the FED can fix it.

Welcome to life on the “permanently high plateau” and good luck!

This sounds about right to me. All the Federal Reserve can do is tinker with short term interest rates. With short term interest rates at zero at what is looking like a major market top, they have foolishly positioned themselves to be irrelevant in the next crash. In order to continue to claim credit for "rescuing" the market, they need to be able to use their interest rate tinkering tool at a time that is coincident with a market bottom.

2 comments:

Thus the survival of the FED, its power and continued relevance are the top priority right now. The fate of the stock market is a secondary concern. Any investor who fails to see this is dancing with the devil in the pale moonlight.

The FED heads apparently think that if they raise rates just a wee smidge – that in the next crisis they will at least have some interest rate ammo, enough to be invited to the table and thus remain relevant and perhaps rally the markets a bit.

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